BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 2439 HEARING: 6/27/12
AUTHOR: Eng FISCAL: Yes
VERSION: 6/20/12 TAX LEVY: No
CONSULTANT: Miller & Grinnell
CORPORATE TAXES: DISCLOSURE
Requires the FTB to publish a list of the 1,500 largest
corporate taxpayers and their tax liability.
Background and Existing Law
Existing state and federal laws generally prohibit unlawful
disclosure or inspection of any income tax return
information. Existing state law (RTC section 19546)
allows a committee of either house of the Legislature to
examine confidential taxpayer information. Criminal
sanctions, including imprisonment, apply to FTB personnel
convicted of unlawful disclosure or inspection of tax
records. The Franchise Tax Board (FTB) must notify a
taxpayer if criminal charges have been filed for willful
unauthorized inspection or disclosure of their tax data.
However, FTB may publish statistical data related to
taxpayer information so long as nothing specific to a
single taxpayer is disclosed. Notwithstanding these
provisions, the Legislature directed FTB to publish a list
of the top 500 tax delinquencies over $100,000 (AB 1418,
Horton, 2006 and AB 1424, Perea, 2011).
Existing state law provides various tax credits designed to
provide incentives for taxpayers that incur certain
expenses, such as child adoption, or to influence behavior,
including business practices and decisions, such as
research and development credits and Geographically
Targeted Economic Development Area credits. The
Legislature typically enacts such tax incentives to
encourage taxpayers to do something but for the tax credit,
they would otherwise not do. Except for four industries
(agriculture, banking & finance, savings &loan and
extractive) California law allows multistate taxpayers to
choose which apportionment formula to use when paying
taxes: the four factor formula based on personnel, property
AB 2439 -- 6/20/12 -- Page 2
and double weighted sales or only on sales (single sales
factor).
Existing law also requires the Department of Finance to
annually publish a report detailing tax expenditures, and
relevant costs.
A Form 10-K is an annual report required by the U.S.
Securities and Exchange Commission (SEC), that gives a
comprehensive summary of a public company's performance.
Although similarly named, the annual report on Form 10-K is
distinct from the often glossy "annual report to
shareholders," which a company must send to its
shareholders when it holds an annual meeting to elect
directors (though some companies combine the annual report
and the 10-K into one document). The 10-K includes
information such as company history, organizational
structure, executive compensation, equity, subsidiaries,
and audited financial statements, among other information.
Companies with more than $10 million in assets and a class
of equity securities that is held by more than 500 owners
must file annual and other periodic reports, regardless of
whether the securities are publicly or privately traded.
In addition to the 10-K, which is filed annually, a company
is also required to file quarterly reports on Form 10-Q.
In the period between these filings, and in case of a
significant event, such as a CEO departing or bankruptcy, a
Form 8-K must be filed in order to provide up to date
information.
Proposed Law
Assembly Bill 2439 requires the FTB to publish on its
website a list of the 1,500 largest corporate taxpayers
filing a Form 10-K with the SEC. Notwithstanding any other
provision of law, including confidentiality requirements,
the largest taxpayers shall be measured by gross receipts
minus returns and allowances. The list shall include the
name and tax liability of each taxpayer and whether the
taxpayer made an election to apportion its income using
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only the sales factor (single sales factor).
The bill requires that the determination for the list
should be based on an original filed timely return and uses
the same criteria to include a taxpayer that is part of a
combined report (gross receipts minus allowances).
The list published on or before December 1, 2013, shall
reflect the tax liability as of October 1, 2013 for the
2010 and 2011 taxable years. Each subsequent annual list
shall reflect the tax liability for the taxable year that
closed two years before the publication of the list. For
two years after the list is published, FTB shall update the
list to reflect any changes of a taxpayer's tax liability.
State Revenue Impact
As the bill was substantially amended on June 20th, the
revenue estimate from the FTB is pending.
Comments
1. Purpose of the bill . According to the author's office:
AB 2439 helps provide transparency and accountability in
the corporation tax system. It asks for one simple data
point which is very close to data which is already publicly
reported in the SEC 10-K, for publicly-traded corporations.
Reporting tax liability consistent with federal reporting
will greatly advance the discussion of corporate tax reform
and potential changes in the law, as it has at the federal
level. Combined with other publicly-available data, this
information will be very helpful in analyzing the impact of
recent major changes in the corporation tax system. In
order to have an informed discussion of on-going tax reform
and to evaluate future proposed policies, it is important
to know who pays and who has benefitted from the recent tax
changes and what the impacts may be of changing the system
during this difficult budget climate.
2. Opposition . The opposition expresses concerns that
AB 2439 -- 6/20/12 -- Page 4
this bill will result in misleading information that
provides no context for a taxpayer's disposition and will
provide no objective evaluation of the single sales factor.
For many multi-state corporations, their finality tax
liability may not be resolved for years after their return
is actually filed so the information in this bill may not
be accurate. Furthermore, the opposition states that
breeching taxpayer confidentiality is punitive to the
individual taxpayer but will not provide further
information to the state to determine whether specific tax
policies made sense.
3. Trade Offs . AB 2439 poses a clear tradeoff in tax
policy: are taxpayer privacy protections more important
than making public information necessary to determine how
much certain corporations pay in tax? While taxpayer
privacy is the cornerstone of a self-assessed income tax
system, how can the Legislature evaluate if the tax system
is equitable when it doesn't know who pays what and what
tax breaks are worth? Financial information is highly
sensitive to both individuals and business - allowing
friends and neighbors to know your financial investments or
personal spending, or to disclose vital data in a tax
return to a competitor, is a violation of privacy. For
these reasons, state law allows felony prosecution for
unlawful inspection and disclosure to enforce these
safeguards, and FTB must notify any taxpayers if criminal
charges are filed. Conversely, the proponents of the
measure state that during this difficult budget climate, it
is imperative to enact the bill to ensure that state
policymakers have the information necessary to determine
the impact of the elective single sales factor on the state
budget. The Committee may wish to consider whether
breaching the veil of taxpayer confidentially is worth the
tradeoff for additional information.
4. Transparent tax credits . AB 2439 represents one method
to compel additional information in the hopes of helping
policymakers better evaluate the effects of tax policy
changes on economic growth and job creation. However, the
strategy may be ineffective for two reasons: first, tax
credits recently enacted by the Legislature have been the
model of transparency, and second, the information
generated that questions its cost-effectiveness hasn't
quelled proposals for more. SB 71 (Padilla, 2010) gave the
California Alternative Energy and Advanced Transportation
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Financing Authority (CAEATFA) the authority to provide
sales and use tax exemptions to green energy manufacturing,
and is arguably the most transparent tax credit program in
the state. CAEATFA updates its website at least quarterly
with information on taxpayers that received the sales and
use tax exemption, the amount of the exemption, the number
of jobs created, and the proposed project's environmental
and economic "net benefits." However, the largest
exemption (over $40 million) to date went to the famously
bankrupt Solyndra, and CAEATFA's own data shows that each
job created by the program costs the state more than
$120,000 in foregone revenue-likely more than the job
itself pays. Legislators continue to propose to expand
CAEATFA programs: SB 1128 (Padilla, 2012) seeks to apply
the SB 71 program to include advanced manufacturing, and AB
796 (Blumenfield, 2012) seeks to expand its loan loss
reserve program. The California Film Commission, which
administers California's motion picture production credit,
issues information about that credit, which the Legislature
recently extended (AB 1069, Fuentes, 2011). The Committee
may wish to consider if new information actually changes
policy. If so, would it make more sense to make the
information necessary at the beginning of any new tax
credit, or compel mandatory performance measures and
sunsets for all new tax expenditures as called for by SB
508 (Wolk, 2011)?
5. Public is public . The Securities and Exchange Act of
1934 requires companies with more than $10 million in
assets whose securities are held by more than 500 owners to
file annual and other periodic reports for the benefit of
its shareholders and the investing public. These reports
are available to the public through the SEC's EDGAR
database. Shareholders and potential investors should
have some idea of a firm's profits and losses, and assets
and liabilities. The Citizens for Tax Justice (CTJ) combed
through the financial reports of the nation's largest
companies and found that 128 of the 250 largest U.S firms
paid no federal corporate income tax in at least one year
between 1981 and 1983 (17 paid no tax in all three). Based
in part on CTJ's work, Congress enacted the Tax Reform Act
of 1986, the largest tax policy reform in the history of
the nation.
The Legislature previously waived individual taxpayer
confidentiality when it directed the tax agencies to
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disclose the top delinquents in the hopes that scarlet
letters enforce compliance. AB 2439 goes much further:
instead of the current reports that FTB compiles on the
aggregate use of each credit, the measure directs state
authorities to publish the names of the top 1,500 firms
that file a form 10-K with the SEC, their total tax
liability and their apportionment formula election.
The proponents of this bill posit that more information and
taxpayer names will result in more information and
potentially substantive policy changes that produce a
better return on investment from California's tax
expenditure. FTB and the Department of Finance already
publish tax expenditure reports detailing each tax
preference and related information, including its costs.
With that information, the Legislature has added more tax
expenditures in recent years than it has limited or
repealed. The opposition states that not only will the
additional information not change public policy, but the
information will lack context and not provide the final
disposition of any individual taxpayer. The Committee may
wish to consider whether substantive change will result
disclosing previously confidential information, especially
given the likely workload tradeoffs for FTB and the
taxpayer privacy compromises necessary to obtain it.
6. Other states . No other state permits the disclosure of
confidential taxpayer information. Four states allow some
information but nothing as specific as this bill and
nothing that specifically breeches taxpayer
confidentiality. The Committee may wish to consider a
combination of disclosure from existing state law.
1. Arkansas - Allows disclosure of the name of any
taxpayer and the amount of any tax credit, tax rebate,
tax discount, or commission for the collection of a
tax received by such taxpayer from certain listed tax
incentive provisions.
2. Massachusetts - Reports disclosing taxable income,
tax, and selected other information are made available
for inspection but the taxpayer names and locations
must be redacted from the reports.
3. West Virginia - taxpayers' usage of tax credits, by
ranges of amounts, are published and information about
compromises of certain civil taxes are published.
4. Wisconsin - Requestors can obtain the amount of tax
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paid or payable for any taxpayer but must agree not to
divulge, publish, or disseminate the information so
obtained.
Assembly Actions
Assembly Revenue and Taxation: 5-2
Assembly Appropriations: 10-5
Assembly Floor: 47-24
Support and Opposition (6/21/12)
Support : California Tax Reform Association (Sponsor);
Alliance of Californians for Community
Empowerment(Sponsor); Service Employees International
Union, Local 721 (Sponsor); American Federation of State,
County, and Municipal Employees; California Federation of
Teachers; California Labor Federation; California Nurses
Association; California Partnership; PICO California;
Service Employees International Union, California.
Opposition : BIOCOM; California Chamber of Commerce;
California Aerospace Technology Association; California
Bankers Association; California Grocers Association;
California Healthcare Institute; California Manufacturers
and Technology Association; California Retailers
Association; California Taxpayers Association; California
Water Association; Capital Area Transportation Authority;
Council on State Taxation; Securities Industry and
Financial Markets Association; Silicon Valley Leadership
Group; TechAmerica; TechNet.
.